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Disastrously Flawed KORUS FTA (Korean-U.S. Free Trade Agreement) Will Never Work for America

March 14, 2013John Olen

Some free trade advocates misleadingly say that free trade deals put us on a level playing field with other countries. This is a view that proponents have tried to attach to the incredibly flawed Korea-U.S. Free Trade Agreement (KORUS). Some who export to Korea even seem to think this is true. KORUS did remove some tariffs for American exporters, but it is far from a level playing field. Due to export limits and, more importantly, Korea’s 10 percent Value Added Tax (VAT), American exporters are still at a huge disadvantage. Meanwhile, South Korea obtained unfettered access to our economy. This is yet another lopsided agreement that destroys American jobs.

Calling KORUS a “free trade” agreement is misleading. Under the agreement we opened our borders almost completely to Korean-made goods, but they have restricted many of our exports. While we allow Korean cars such as Hyundais and Kias to enter our country in unlimited numbers, American automakers are limited in how many cars they can ship to South Korea. Ford, Chrysler and GM can only ship a combined 75,000 cars to South Korea–Korea regularly sells over 600,000 cars a year in the United States. The U.S. also provides a much bigger market in general, as our population is more than six times larger than South Korea’s.

The problems with this agreement have quickly become apparent. The agreement went into effect in March, and it took only a scant amount of time to see that fears about the agreement were well-founded. The trade deficit nearly tripled in one month to $1.8 billion, which was also a $700 million increase from April of 2011. May saw an additional increase, and in tandem these two months showed a 63 percent increase in our trade deficit over the previous year. Our exports actually fell by 12 percent in the first month, which was exactly the opposite of what we were told would happen by our leaders.

The months since have shown a continued trend of growing deficits. Four months of trade data since the implementation of KORUS are available from the Census Bureau, and in each of these four months our trade deficit with South Korea has grown. August 2012 is particularly striking, as our trade deficit more than doubled from a $737 million shortfall to $1.59 billion. It seems safe to say that our yearly trade deficit under KORUS will be much higher than prior to this misguided agreement.

If any American manufacturer believes they are sending their goods to South Korea tariff-free, they are being misled. It is true that KORUS did eliminate some tariffs for American goods, but everything we export is still subject to South Korea’s 10 percent Value Added Tax (VAT). While Korea’s domestic manufacturers can receive rebates for the VAT they pay, American producers have no choice. This VAT makes American goods more expensive and less appealing to South Korean consumers. Every major industrialized country uses a VAT except the United States. This means that every time we enter into a new free trade agreement we are entering into a situation where American producers are at an undeniable structural disadvantage.

The United States needs to recognize that the free trade agreements we sign benefit only a small minority of wealthy individuals. They reap the benefits, while other Americans lose their jobs. Our government continues to push these agreements despite the fact that they are bad for our country. This is unsustainable, and needs to change IMMEDIATELY for the good of the country.